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Venkata Satya Surya ... v. Income Tax Officer, ...
Concise Analytical Summary of the ITAT Order (V. Durga Rao, Judicial Member) — 22 Jan 2020
Factual and Procedural Background
This appeal by the assessee (Venkata Satya Surya Sree Ranganadha Raju Alluri) challenged the order of the Commissioner of Income Tax (Appeals)-6, Hyderabad dated 18/06/2018 for Assessment Year 2012-13.
A search and seizure under section 132 of the Income Tax Act, 1961 was conducted at M/s. Arihant Educational Society (which runs Chalimeda Ananda Rao Institute of Medical Science) on 25/07/2013. Seized material during that operation indicated collection of capitation fees/donations over and above the government-prescribed fee for management quota seats. The recovered material and information showed that the assessee had allegedly paid Rs.30,00,000 in cash (over and above the prescribed fee) for the admission of his son, Dr. Alluri Rajesh Verma, into a P.G. course for the academic year 2011-12.
A notice under section 153C dated 15/03/2017 was issued to the assessee. The assessee filed a return for A.Y. 2013-14 on 26/04/2017 declaring NIL income. The Assessing Officer issued notices under sections 143(2) and 142(1) and sought explanations. The assessee stated that certain payments were made by family members (listing three dated payments by son, wife and another son). The Assessing Officer, on being unsatisfied with the explanation and finding no source for the son's funds, treated amounts aggregating Rs.35,79,600 (Rs.30,00,000 + Rs.5,79,600) as unexplained cash credits and added that sum to the assessee's income.
The assessee appealed to the Commissioner of Income Tax (Appeals) who confirmed the Assessing Officer's additions, holding that the seized documents and the cashier's statement recorded under section 132(4) conclusively proved the payment of Rs.30,00,000. The assessee further appealed to the Income Tax Appellate Tribunal (ITAT).
Legal Issues Presented
- Whether an addition in the hands of the assessee, based on seized material found in the premises of a third-party college and on that college cashier's statement recorded under section 132(4), is sustainable when the assessee was not given an opportunity to cross-examine the cashier whose statement was relied upon.
- Whether the addition of Rs.5,79,600 as unexplained cash credit is sustainable where the assessee says the amount was paid by the assessee's son using gifts from relatives (supported by bank statements and a payment by demand draft), and the CIT(A) rejected that explanation without stating reasons.
Arguments of the Parties
Appellant's (Assessee's) Arguments
- The entries in the books of the college and the cashier's statement cannot be treated as conclusive proof against the assessee because the seized material was found in the college premises and therefore, under section 292C, should be presumed to belong to the college (a third party), not directly to the assessee.
- Since the addition in the assessee's hands is based on a third party's statement (the cashier's), the assessee should have been given an opportunity to cross-examine that witness before adverse inference/addition was made. The assessee relied on the decision of the Hon'ble Supreme Court in Andaman Timber Industries to support the contention that denial of the right to cross-examine is a breach of natural justice and vitiates the order.
- As regards the Rs.5,79,600, the assessee maintained that this amount came to the son as gifts from relatives, deposited into bank accounts and paid by demand draft; the assessee filed bank statements (paper book pages 25–32) to support the explanation and argued that mere suspicion is insufficient to make an addition without examining donors or verifying the claimed source.
Respondent's (Revenue's) Arguments
- The learned Departmental Representative submitted that the addition was made on the basis of seized material (and the cashier's statement), and therefore no interference with the Assessing Officer's and CIT(A)'s conclusions was warranted.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Andaman Timber Industries Vs. Commissioner of Central Excise [(2015) 281 CTR 214 (SC)] | The Supreme Court held that failure to give an assessee the right to cross-examine witnesses whose statements are relied upon is a breach of principles of natural justice and is a serious flaw rendering the order a nullity. | The Tribunal applied this principle to conclude that the Assessing Officer (and the CIT(A) in confirming the addition) relied on a third-party cashier's statement recorded under section 132(4) without giving the assessee an opportunity to cross-examine. On that basis the Tribunal held that the addition based on that statement/seized material could not be sustained and deleted the addition. |
Court's Reasoning and Analysis
The Tribunal reviewed the factual matrix: seized material showing Rs.30,00,000 was found in the premises of M/s. Arihant Educational Society and a cashier's statement under section 132(4) corroborated that entry. The Assessing Officer treated the amount as paid by the assessee and added it to the assessee's income; the CIT(A) confirmed that finding.
The Tribunal reasoned as follows:
- Presumption of possession: Because the seized material was found in the college's premises, it is to be presumed that the material belongs to the college (a third party). The Tribunal emphasized that seized material found in a third-party's possession cannot be treated as conclusive evidence imputable directly to the assessee without further procedural safeguards.
- Right to cross-examination: When the Assessing Officer proposes to make an addition in the assessee's hands but relies on a statement of a third party (the cashier), and the assessee denies the payment, the Assessing Officer should give the assessee the opportunity to cross-examine that third-party witness before passing the assessment order. The Tribunal found that no such opportunity was given here.
- Application of Andaman Timber: The Tribunal relied on the Supreme Court's view that denial of the right to cross-examine witnesses relied upon breaches natural justice and renders the order a nullity. Applying that principle, the Tribunal concluded that the addition based on the cashier's statement and the seized material could not stand.
- On the Rs.5,79,600 addition: The Tribunal examined the assessee's explanation that the amount originated as gifts from relatives, was deposited into the son's bank account and paid by demand draft. The assessee produced bank statements in support. The CIT(A) had rejected the explanation without giving reasons. The Tribunal found that rejection without articulable grounds was improper: if the Department had doubts, it should have summoned donors or made further inquiries rather than making an addition on mere suspicion.
The Tribunal limited its analysis to the procedural deficiency (failure to allow cross-examination) and the insufficiency of reasons for rejecting the explanation regarding the Rs.5,79,600. It did not create or announce any new legal principle; it applied existing authority and principles of natural justice to the facts.
Holding and Implications
Holding: APPEAL ALLOWED.
Immediate consequences:
- The Tribunal deleted the addition of Rs.30,00,000 that had been treated as unexplained cash credit in the assessee's hands (which had been based on seized material found in the college premises and the cashier's statement), and set aside the CIT(A)'s confirmation of that addition.
- The Tribunal also deleted the addition of Rs.5,79,600 after finding that the assessee had offered an explanation (gifts from relatives paid through bank/demand draft and supported by bank statements) which the CIT(A) rejected without adequate reasons; the Tribunal observed that the Department should have made further inquiries (for example, examined donors) if it had doubts rather than making an addition on suspicion.
- Accordingly, the Tribunal reversed the order of the CIT(A) and allowed the assessee's appeal for the Assessment Year 2012-13.
Broader implications:
The Tribunal's decision underscores procedural safeguards when third-party material and third-party statements are relied upon against an assessee: the assessee must be afforded an opportunity to test such evidence (including cross-examination) before adverse inferences are drawn. The Tribunal applied the Supreme Court authority (Andaman Timber Industries) to the facts. The order did not purport to lay down a new legal principle beyond applying established law on natural justice and evidentiary procedure.
Order pronounced on 22nd January, 2020. Bench: V. Durga Rao, Judicial Member. The appeal was allowed and copies were directed to the assessee and relevant departmental officers as noted in the order.
This appeal by the assessee is directed against the order of Commissioner of Income Tax (Appeals)-6, Hyderabad, dated 18/06/2018 for the Assessment Year 2012-13.
2. Facts of the case, in brief, are that a search and seizure operation u/sec. 132 of the Income Tax Act, 1961 (hereinafter referred to as "Act") was conducted in the case of M/s. Arihant Educational Society at Bommakal Village, Karimnagar on 25/07/2013 which is running a medical college in the name of Chalimeda Ananda Rao Institute of Medical Science (CAIMS).
2 ITA No.2070/HYD/2018 (Venkata Satya Surya Sree Ranganadha Raju Alluri) During the course of search and seizure operation evidences indicating collection of capitation fees/donation over and above the regular fee fixed by the Government for management quota seats in medical college were found and seized. As per the information received from the office of the DCIT, Central Circle-2(2), Hyderabad, it was noticed that the assessee has paid Rs.30.00 lakhs (over and above the regular fee) towards admission of his son Dr. Alluri Rajesh Verma in P.G. course for the academic year 2011-12. The information received by the DCIT, Central Circle-2(2), Hyderabad, is extracted as under:- Students Name Fathers Name Prescribed fee paid Address and contact No. Amount paid in cash over and above prescribed Dates of payments Dr. Alluri Rajesh Verma A. Venkata Sathya Surya Rangananda Raju 15,75,000 Plot No. 226, Road No. 78, Jubilee Hills, Hyderabad. 30,00,000 03/05/2012 (Rs. 5.25 lakhs onlne) 15/04/2011 (Rs.10.00 lakhs) 27/05/2011 (Rs. 5.00 lakhs) 28/05/2011 (Rs. 5.00 lakhs) 31/05/2011 (Rs. 5.00 lakhs) 07/07/2011 (Rs. 5.00 lakhs In view of the above, a notice u/sec. 153C dated 15/03/2017 was issued and served on the assessee. In reply, the assessee filed his return of income for the A.Y. 2013-14 on 26/04/2017 by
3 ITA No.2070/HYD/2018 (Venkata Satya Surya Sree Ranganadha Raju Alluri) declaring NIL income. Subsequently, the Assessing Officer has issued notices u/sec. 143(2) & 142(1) and called the assessee to file certain information. During the course of assessment proceedings, the assessee has submitted that he has not paid any amount from his source to M/s. Arihant Educational Society towards fee/capitation fee and paid the same from the following family members:- Date Name of Payer Amount (Rs.) Mode of payment 28/04/2011 A. Rajesh Verma (Son) 5,79,600/- DD 02/05/2012 A. Satyavathi Raju (wife) 5,25,000/- RTGS 05/11/2013 A. Rakesh Verma (Son) 5,25,000/- DD The assessee was asked to produce the source of income of his son. However, the assessee failed to produce the source of income neither in his own hand nor in the hands of his son. Hence, addition of Rs. 35,79,600/- (Rs. 30,00,000 + Rs.5,79,600) is treated as unexplained cash credits in the hands of the assessee and added the same to the total income of the assessee.
3. On being aggrieved, assessee carried the matter in appeal before the ld. CIT(A). So far as entry of Rs.30.00 lakhs found in the books of account of M/s. Arihant Educational Society is concerned, the ld. CIT(A) gave a finding that the documents seized by the department u/sec. 132 is corroborative by the
4 ITA No.2070/HYD/2018 (Venkata Satya Surya Sree Ranganadha Raju Alluri) statement given by the cashier of the college. It is conclusively proved that the assessee has made payment to the extent of Rs.30.00 lakhs during the F.Y.2011-12 relevant to the A.Y. 2012-13 in connection with getting P.G. admission under the management quota in the medical college. This amount was paid by the assessee over and above the regular fee prescribed by the Government. With this observation, the ld. CIT(A) confirmed the order of the Assessing Officer.
4. Before me, ld. counsel for the assessee has submitted the entry made in the books of account of the medical college and also the statement given by the cashier of the college, cannot be considered as conclusive proof. As per section 292C, any material found in the possession of a person is presumed to be belonging to that person whose possession the material is found. In this case, the seized material was found in the premises of the college and therefore it has to be presumed that the seized material is belonging to the college. The addition solely based on the seized material is not valid, if at all the addition has to be sustained, an opportunity should be given to the assessee to cross-examine the cashier of the college who gave statement u/sec. 132(4) of the Act. For that, he relied on the decision of the Hon'ble Supreme
5 ITA No.2070/HYD/2018 (Venkata Satya Surya Sree Ranganadha Raju Alluri) Court in the case of Andaman Timber Industries Vs. Commissioner of Central Excise [(2015) 281 CTR 214 (SC)] and submitted that addition cannot be survived.
5. Ld.DR submitted that addition is made on the basis of seized material, therefore no interference is warranted.
6. I have heard both the parties, perused the material available on record and gone through the orders of the authorities below.
7. There is a search and seizure carried on in the case of M/s.Arihant Educational Society where seized material was found to the extent of Rs. 30.00 lakhs. A statement of the cashier was recorded u/sec. 132(4) and accordingly issued notices to the assessee calling explanation in respect of cash payment made by the assessee relating to the admission of his son into P.G. medical course under management quota. The assessee categorically explained that he has not paid any amount over and above the fee as prescribed by the Government. However, the Assessing Officer not accepted the explanation of the assessee and based on the seized material and statement of the cashier, addition of Rs. 30.00 lakhs was made as unexplained source in the hands of the assessee, the same is confirmed by the ld. CIT(A) in appeal. According to the ld. CIT(A), seized material and statement given
6 ITA No.2070/HYD/2018 (Venkata Satya Surya Sree Ranganadha Raju Alluri) by the cashier of the medical college is conclusive proof, hence, addition made by the Assessing Officer was confirmed. I find that when the seized material was found in the premises of the college, it has to be presumed that it belonging to the college. When the addition is proposed in the hands of the assessee and when assessee has specifically denied, the Assessing Officer should have given opportunity to cross-examine the cashier and thereafter he has to pass the assessment order. In this case, without giving opportunity to the assessee to cross-examine the person who has given statement u/sec. 132(4) on behalf of the college, simply addition was made on the basis of seized material, in my view, is not correct. I, therefore of the opinion that the addition made by the Assessing Officer and confirmed by the ld. CIT(A) cannot survive. Accordingly, addition is deleted.
8. So far as the judgment of the Hon'ble Supreme Court in the case of Andaman Timber Industries (supra), the Apex Court has expressed a view that failure to give the assessee the right to cross-examine witnesses whose statements are relied upon results in breach of principles of natural justice. It is a serious flaw which renders the order a nullity. In the present case, the Assessing Officer based on the seized material and statement given by the
7 ITA No.2070/HYD/2018 (Venkata Satya Surya Sree Ranganadha Raju Alluri) cashier of the college addition was made. Therefore, the addition is based on the statement of the third party though assessee has not specifically asked for cross examination, it is the duty of the Assessing Officer to give opportunity to the assessee and allow him cross-examination. In this case, the assessee specifically denied that he has not paid any amount other than the amount paid by him as per the Government prescribed fee. Keeping in view of the principles laid down by the Hon'ble Supreme Court in the above referred to case, the addition made by the Assessing Officer has to be deleted and the order of the ld. CIT(A) has to be cancelled. Accordingly, I find that the order passed by the ld.CIT(A) is not correct therefore same is cancelled.
9. So far as addition in respect of Rs. 5,79,600/- is concerned, though the assessee has not explained the source before the Assessing Officer, it is submitted that assessees son has received gift from his close relatives and the same is paid through demand draft. The ld. CIT(A) has simply discarded the explanation given by the assessee by saying that there is no source of income for payment made by the assessees son to the extent of Rs.5,79,600/- and confirmed the addition. The case of the assessee is that his son has received gifts from his relatives for
8 ITA No.2070/HYD/2018 (Venkata Satya Surya Sree Ranganadha Raju Alluri) admission in P.G. college and the amount was paid through demand draft. The assessee also filed all the bank statements in the form of paper book at page Nos. 25 to 32. By considering the explanation given by the assessee and also bank statements, I find that ld. CIT(A) simply rejected the explanation of the assessee without giving any reason that the transaction is not genuine and the assessees son has no other source. The assessee has given a detailed explanation and filed bank statements and particularly payment is made through demand draft. The assessee particularly submitted before the ld. CIT(A) that his relatives have contributed for payment of fee and the same is deposited in the bank account and paid through demand draft, in my opinion, addition cannot be made on the basis of suspicious without there being any basis. If at all, the Assessing Officer is having any doubt about the donations received by the assessee, he ought to have summoned the donor and called the explanation and thereafter decide the issue. Without making any effort, simply making the addition on the basis of suspension is not correct. Thus, I find that the addition made by the Assessing Officer cannot survive and the same is deleted. In view of the
9 ITA No.2070/HYD/2018 (Venkata Satya Surya Sree Ranganadha Raju Alluri) above, I reverse the order passed by the ld. CIT(A) and allow the appeal of the assessee.
10. In the result, appeal filed by the assessee is allowed. Order Pronounced on this 22nd day of Jan., 2020. Sd/- (V. DURGA RAO) Judicial Member Dated: 22nd January, 2020. vr/- Copy to:
1. The Assessee Venkata Satya Surya Sree Ranganadha Raju Alluri, Plot No. 226, Road No. 78, Jubilee Hills, Hyderabad.
2. The Revenue ITO, Ward-14(1), Hyderabad.
3. The Pr.CIT-6, Hyderabad.
4. The CIT(A)-6, Hyderabad.
5. The D.R., Hyderabad.
6. Guard file. By order Sr. Private Secretary, ITAT, Visakhapatnam.
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